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Israel – ‘The Startup Nation’, Lessons For India

I recently returned from an interesting visit to Israel - the 'Startup Nation', as part of a delegation invited by the Israel government. The goal of the visit was to learn more about the Israeli startup and innovation ecosystem and improve start-ups level contact between India and Israel.

It is quite impressive to note the progress Israel has achieved since its creation in 1948. Its growth and innovation in a variety of sectors: agriculture, water management, defense, cyber security, information technology, semiconductors and others, provide great learning examples. During this short trip, we were able to visit startups, co-working spaces, maker-spaces, venture capitalists, incubators, universities, and supporting agencies. We also attended a couple of industry conferences (Cybertech 2018, Tel Aviv and 2018 OurCrowd Global Investor Summit, Jerusalem).

In the packed agenda, we didn’t get to see a lot of this country’s tourist attractions – but the brief tours of Haifa, Old City of Jaffa, and the historic city of Jerusalem were very interesting (I will write about this in a separate article). Suffice to say, Israel can be a great travel destination for the Indian tourist. This small country has a lot to offer: great history and culture, diverse nature, nightlife, good food, and a chance to meet with great people.

Israel is a small country, with an area of around 20,000 sq km (just a bit bigger than Pune District), and a population of 8.5 million (less than half of Mumbai). Faced with multiple geopolitical, climate and geographical challenges, it has made tremendous progress in building a world class innovation and startup ecosystem, over the past few decades.

Today, Israel has over 7,000 startups, over 350 VC Funds, and over 300 corporate R&D centers. There were over 100 startup exits, worth $23 billion in 2017. This was a big jump from $10 billion in 2016 – largely driven by the huge acquisition of Mobileye (Computer Vision, Machine Learning Tech – for self-driving cars, other applications) by Intel for $15 billion, in August 2017. The Mobileye exit is a great case-study and success-story for Israeli startups. Historically, U.S. has been the biggest market for Israeli tech startups and companies. Today, Israel has the 3rd largest number of NASDAQ listed companies (following U.S. and China).

What drives this startup and innovation miracle?

I will attempt to highlight some key attributes and reasons. I will also summarize some lessons that could be learned and applied to the Indian ecosystem. For detailed reading on Israel’s startup ecosystem, I would recommend an excellent book: ‘Startup Nation’ by Dan Senor and Saul Singer (a bit old; published in 2011 – but still quite relevant).

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There are three primary factors that have helped in laying the foundation of the Israeli startup and innovation ecosystem:

2. Role of Government (Support for Universities, Incubators, Strategic Focus on R&D)

3. VCs, Multi-National Corporations, and the Corporate Ecosystem

Culture

Israel has faced a tough environment (nature and geopolitics) since it was created in 1948. A large part of the country is desert, with very limited water resources. Israel has fought multiple wars with its neighbours over the past 70 years, and national security is a top priority. These necessities have driven the need to innovate in agriculture, water management and defense sectors, and has driven a culture of ‘problem solving’, with constrained resources. The culture promotes ‘Okay to Fail’ and a ‘Challenge Everything’ attitude.

Military service is mandatory in Israel after age 18. Students enter a three-year program and are trained in a variety of different skills. Depending on their capabilities and openings, they are assigned specific departments and roles. They learn military and other hard-skills in various tech and non-tech areas. They learn important soft-skills such as leadership, discipline and team-work. They also learn about tough decision making, especially in uncertain situations. They build great networks, which often last them a life-time, and are very useful during their startup/corporate life.

(Photo by Amit Paranjape)

Israel is a small country, and is highly networked. A popular saying, we heard multiple times during our visit – “Everyone is connected to everyone else with a maximum ‘one degree of separation’”. These networks are critical in entrepreneurship to help recruit the right people, get the right early customers, raise funding, etc.

One example of the military service training and its direct connection to successful entrepreneurship and startups is the ‘8200 Unit’. We heard about this in multiple presentations during our visit. The ‘8200 Unit’ is one of Israel’s top military intelligence unit, involved with a variety of cyber-security, cyber warfare related initiatives. This unit usually ends up recruiting the top engineering and mathematics students during the military service. These recruits are trained by the top experts and work on challenging projects. The alumni of this unit later on end up studying at the top universities, working with the corporates and starting key startups (especially in the cyber-security, data analytics and related areas).

Education

For a country of just around 8 million people – Israel has 8 top ranked global universities and over 50 colleges. It has 12 Nobel Laureates. The country is among the top in the world in R&D spending (combined government and corporate) as a percentage of GDP at 4.3%. (For comparison – India spends less than 0.8%).

Israel is also benefitting from ‘brain gain’. Top Israeli PhD students who have studied in U.S. and other top global universities are moving back to their country, after gaining top academic research and corporate R&D experience.

On a related note, it is worthwhile to mention that Israel has started attracting a good number of Indian students in higher education (Now at about 1,000 – still significantly smaller than the number that goes to U.S…but rising).

The Israeli education system encourages a culture of risk taking and asking questions, right from the early years.

Government support for startups and innovation

The Israeli Government also plays an important role in the startup and innovation ecosystem, both directly and indirectly.

Directly, it supports many entrepreneurship programs, funds, and incubators (total of 19). The incubators provide the risk capital, facilities and mentoring. Many incubators are connected with the universities. This helps the university students with their startup ideas, and also enables access to professors and other experts for mentoring.

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As mentioned earlier the government also plays an important role in funding the universities as well for various research projects.

Another indirect way in which government supports the startups is through funding strategic R&D projects in agri-tech, water management and defense. As discussed earlier, these are key priority areas, and availability of funds and pilot projects (government is the customer) also helps startups.

In 1993, the government helped start the Israeli VC industry, by backing the Yozma Fund. Tax reforms for the corporate sector have brought corporate tax down to 10%. In addition, the Israel Innovation Authority provides direct R&D funding for projects.

Role of corporate sector

Many large and medium sized tech multi-nationals have a strong presence in Israel. Over 320 R&D and Tech centers of multi-national companies are located here. These include Intel, IBM, Microsoft, Cisco, TI, Samsung, Oracle and SAP (just to name a few). Around half of Israel’s tech workforce is employed by these multi-nationals. Many of them are based in Israel’s high-tech hub, Haifa.

In fact, Haifa reminds you of Silicon Valley for multiple reasons. The city is located by the sea and has Israel’s most important harbour. Major part of the city is located on the hills next to the sea. Haifa is home to many tech companies and also one of Israel’s top engineering universities, Technion. The sea, the drive through the hills, the tech company campuses in close proximity, the university all remind you of the San Francisco Bay Area.

A good example is Intel (which has been here for over 30 years). They are doing world class high-end R&D here, comparable with the best in the world (e.g. Silicon Valley). The earlier mentioned book ‘Startup Nation’ has a great case-study on Intel Israel’s work on the power saving chips.

These large multi-national companies have invested in Israel due to two main reasons: 1. Availability of top science & engineering talent (from universities and startups). 2. ‘Brain Gain’ phenomenon.

People who have worked in these companies have excellent global exposure to not only the latest technology, but also to markets. Many hi-tech startups in Israel are founded by the alumni of these multi-national companies. Some of these startups also get good exits, when multi-nationals buy them out. Following the exit, the entrepreneurs move onto newer startups, and also become VCs – thereby further continuing the cycle of further development.

Lessons for India

There are many lessons applicable to India, which can be learned from Israel’s startup and innovation ecosystem. Some of these lessons maybe more relevant than the ones from Silicon Valley. These lessons can be categorized across culture, education, role of government, and role of corporates.

But before we get into those, it is important to note that there is a widespread myth that most entrepreneurs and successful startup founders are fresh undergrads or college drop-outs. Bill Gates and Mark Zuckerberg are big exceptions, not the rule.

Experience is a key factor for successful high value IP (Intellectual Property) driven startups. The average age of startup founders in the Silicon Valley and Israel is closer to 40. A typical startup founder is someone who has completed higher education (MS/PhD) and worked further in research/development for some years. This experience is not only useful for gaining deeper domain knowledge, but to also gain a good network of potential co-founders, employees, pilot customers, partners and investors.

While it is important to teach entrepreneurship to undergraduate students and giving them opportunities to build on their ideas – it is unrealistic to expect many breakthrough startups to come out of undergraduate colleges.

Culture & Education

Culture is difficult to emulate. It’s a more fundamental thing. Yet there are some aspects of the culture that are common across the two India and Israel (e.g. ability to do more with less, with constrained resources). These abilities in India need to be encouraged and rewarded. Of course, there is a right way of doing things and doing a total ‘Jugaad’. Need a right balance.

Indian education system discourages asking questions and challenging the authority – quite opposite of the Israeli system. Changing this is a huge task.

At the higher education level, a significant shift is required. India’s investment in R&D is very low across the board, and this also reflects in our funding of our higher education and research institutes. This needs to change. Of course, the efficiency and utilization of these funds also needs significant improvement.

We need to focus on improving our Masters and PhD level programs. We need quality, not quantity. We need to focus on relevant, market-ready IP creation. Today, our institutions like the IITs produce some of the best undergraduates in the world. However, the same cannot be said about our Masters and PhD students.

Some of our best undergrads end up doing MS/PhDs outside India (mostly in U.S. and in Europe, Japan, and other countries). This is a key issue and needs immediate attention (will need a separate article to discuss this in detail). The Indian government is taking some steps in this direction (like the recently announced PhD scholarships), but a lot more needs to be done. We need to track and improve the number of IIT, IISER, IISc B.Tech/MS graduates, who do PhDs in India.

Since we don’t produce many world class PhDs, the multi-national R&D centers don’t recruit them here. This is one reason good students are not doing PhDs in India, since there are very few good corporate R&D job opportunities. This is partially a chicken and egg problem. The cycle can be broken by upgrading our research facilities and PhD programs and improving the supply.

In some aspects IITs and the new IISERs are comparable with the best in the world. But they need a long way to go, before we could count some of these in the top-50 global universities. The quality vs. quantity argument is valid here too. Yes, we need more institutes; but we also need sustained focus (and resources/funding) to get at least 1-2 of the old IITs to world class level.

To further improve the quality of PhD programs in India, we need more university to university collaborations. These need to move forward with concrete programs at the department levels – and not just stay at signing ‘MoUs’.

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Role of Government

As discussed earlier, the government has to play a key role in improving higher education (Masters and PhD programs). In conjunction, it is also critical to improve our basic research & development capabilities. We need large investments and great execution (like ISRO). Our R&D spend as a percentage of GDP is way low at 0.8% (compared to 4.3% for Israel, and 2.5% for China).

Government also needs to fund creation of Incubators that provide funding, support and mentoring for deserving startups. Here again, quality is more important than quantity. As mentioned earlier, Israel has less than 20 incubators. We need more startups with good solid IP; not yet another ‘me-to’ incremental e-business innovation, that too copied from a U.S. startup idea. We need more startups in cyber-security, agri-tech, energy, AI, healthcare, biotech, advanced manufacturing, materials, etc. and less in e-commerce.

A good example of successful (yet low profile) incubator in India, which supports startups with high value IP, in the areas of biotech, materials, energy, is the Innovation Center at National Chemical Laboratory in Pune. We need more startups founded by PhDs and senior R&D professionals, who have created some new, non-trivial IP.

Third and important long term area for government support is exploring the ‘DARPA’ (Defense Advanced Research Projects Agency) model from U.S. Israel follows a similar model.

DARPA is a U.S. government agency that funds strategic projects in the area of defense and national security. A good portion of this funding is received by the private sector. DARPA provides strong program management and oversight (by its own program managers) on these projects, executed by the private sector. This ensures good execution and efficient usage of the R&D dollars. The Program Managers from DARPA are industry veterans and are experts in specific domain areas.

In U.S. and Israel, the offshoots of defense related spending on strategic projects (through DARPA and other agencies) has resulted in many dual use products and technologies. These technologies are later commercialized or built upon by established companies and even startups. In many respects such agencies provide a basic R&D foundation (much like state supported universities), and help the overall innovation and startup ecosystem.

In India, the DRDO model is mostly all government (public sector). We need to understand, evaluate (and adapt as required) the DARPA model for India as well.

Role of Corporates

Indian private sector companies in tech and other sectors also need a strategic product/IP vision. Today, along with the government, the private sector too contributes to a significantly lower R&D spend, compared to their international peers.

In the IT space, India has been largely focused on the Software Services. Some of these large companies are sitting on large cash piles. The IT Services market is ripe for disruption with cloud, automation and other structural shifts. Now is the time for these IT Services companies to start investing more in product R&D and IP creation. They can also allocate more funds for their venture capital arms, which can in turn drive funding of IP driven product startups.

Closing Comments

We need to progress in multiple areas simultaneously, if we want to build a good, high-value IP driven startup ecosystem. Israel provides some good learning examples. We need to move to a ‘product’ and ‘solution’ mind-set. ‘Make in India’ should not just be about manufacturing, but also about IP creation, core R&D and import substitution in strategic areas. We need to improve startup to startup and university to university level contacts and close collaborations with Israel, U.S. and other countries.

The Indo-Israel Joint Innovation Fund announced last year during PM Modi’s visit is a good start. The Indian market is important for Israeli startups, and joint IP development should be explored. Lastly, we need better alignment between defense driven R&D and funding with our universities, corporate R&D and startups.